Neuland Labs and Aarti Ind our top two buy ideas: Siddhartha Khemka

Siddhartha Khemka, Head of Equity Research, Centrum Broking, has come out with buy ratings on Neuland Labs and Aarti Industries. He explained his rationale in an interview with ETNow. Experts.

ET Now: You have two interesting strategies, Neuland Labs and Aarti Industries. Why do you like these names? Siddhartha Khemka: Aarti Industries is a mid-sized company from our coverage. Currently, we have a ‘buy’ rating on the stock. The company is into speciality chemicals and if you see, the overall Indian speciality chemical players have been gaining share in the global market over the past few years and that is mainly because of structural shift that India is witnessing vis-à-vis China, which is a major player in the specialty chemicals space. India not only provides better environmental norms and IPR protection but the currency has been favourable for Indian companies over the past few years.

The Chinese currency has appreciated about 5 per cent in the last five years compared with the Indian currency, which has depreciated about 45-50 per cent so that can also help these companies. Further, Aarti Industries has been increasing its capacity in last few years to cater to this increasing demand. In FY16, it did a capex of about Rs 500 crore, while for FY17 it has lined up another capex of Rs 400 crore, which would continue to help growth in revenues as well as profits. The company has decent margins and better return ratios above 20 per cent, trading at comfortable valuation of 12 times. We see anywhere between 18-20 per cent upside in the stock.

As for Neuland Labs, it is a small-sized company from our coverage. It is into APIs as well as customs manufacturing solutions. If you see, Neuland has been transforming its business in last few years: earlier it used to focus on high volume, low margin APIs; from that it has now shifted its focus to the high margin complex APIs or the niche APIs that the company calls margin accretive.

If you see, margins have already gone up over the past few years from 13 per cent to 15-16 per cent and it is expected to improve further to about 18 per cent. So while top line is expected to grow at a steady pace of 20 per cent, PAT is expected to see a significant growth at almost 50 per cent CAGR. The stock has already seen a sharp move and has been re-rated consistently in recent times. Going by valuations, we see about 14-15 per cent upside in the stock and have an accumulate rating on it.